The Advantages of Fixed-Rate Mortgages
The mainstay of the mortgage markets has always been fixed-rate mortgages. In a nutshell, a fixed-rate mortgage is a mortgage loan which has the same interest rate for the entire term of the loan. This has a very nice effect for the mortgagee (the person borrowing the money) which is that the Principle and Interest (P & I) portion of their monthly payment stays the same through the years.
The other things in the monthly payment such as insurance, taxes, some processing fees, etc. may change but the P & I will always be the same; or at least within a few cents if calculation rounding issues are involved. This fact produces both advantages and disadvantages for the person borrowing the money.
There are 3 disadvantages that I see with respect to a fixed-rate mortgage:
- The major disadvantage associated with a fixed-rate mortgage is that the P & I portion of you payment is always the same.
A disadvantage?… Why?
Because, If you “bought” your mortgage during times of economic difficulty and conditions/interest rates improve, you will have a higher interest rate than you would have had if you had obtained an Adjustable Rate Mortgage (an ARM). That in turn means that during periods of economic prosperity (which are usually accompanied by lower interest rates), you will probably be paying more in interest than you would otherwise.
- The mortgage loan amount that you can get approved for will probably be lower than that of an Adjustable Rate Mortgage (an ARM) and hence the house, neighborhood, schools, etc. may not be as nice as they might be with a higher loan amount.
- Fixed-rate mortgages tend to be a bit harder to get because the lender is absorbing the risk of interest rate fluctuations.
Actually, there are several advantages to fixed-rate mortgages:
- The P & I portion of your payment will always be the same for the life of the mortgage loan. This can be a real worry stopper!
- Your mortgage lender will absorb the risk associated with interest rate-related issues.
- Most people are less likely to lose their home due to foreclosure.
- A fixed-rate mortgage loan would tend to contribute to more stable family units due to less uncertainty during times of economic difficulty. This in turn would tend to reduce the frequency of mortgage related divorces… My personal opinion.
What Kind Of Mortgage Loan Should You Get?
The kind of mortgage that you should seek depends totally upon you and your economic situation.
Personally, I have an ARM that I obtained during a period of economic instability and have an enormous interest rate that is more than double the current rate. I look longingly at the payment of $800 or so per month that would accompany a fixed price mortgage right now. So, I wish that I had gone with a fixed price mortgage at the time I obtained my mortgage loan. However, at the time it seemed to be the right decision for me and my family.
Whether you go for an ARM or a fixed-rate mortgage is something that you will need to decide for yourself.
Knowing what I know now, I think that I would have gone for a fixed-rate mortgage if I could do it over again.
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